MTech Acquisition Corp. (NASDAQ:MTEC) MTech Acquisition Corp and MJ Freeway LLC Announce Merger Agreement October 16, 2018 4:00 PM ET
Scott Eckstein - KCSA
Steven Van Dyke - Executive Chairman
Scott Sozio - Chief Executive Officer
Jessica Billingsley - Chief Executive Officer, MJ Freeway
Ruth Ann Kraemer - Chief Financial Officer, MJ Freeway
Good afternoon. And welcome to today's conference call to discuss the merger between MTech Acquisition Corp. and MJ Freeway. Today's call is being recorded. All lines have been placed on mute.
At this time, I would like to turn the conference over to Scott Eckstein with KCSA for introductions and the reading of the safe harbor statement. Please go ahead sir.
Thank you. And welcome to today's conference call to discuss the merger between MTech Acquisition Corp. and MJ Freeway. Representing the companies today are MTech's Executive Chairman, Steven Van Dyke, Scott Sozio, Chief Executive Officer of MTech; Jessica Billingsley, Chief Executive Officer of MJ Freeway; and Ruth Ann Kraemer, MJ Freeway's Chief Financial Officer.
The notice of the accessibility of this conference call on a listen only basis was distributed yesterday afternoon in a press release that was filed as an exhibit to the current report on Form 8-K filed by MTech on October 15, 2018 with the Securities and Exchange Commission.
During this conference call, certain statements will be made that are forward-looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Words such as estimates, projected, expects, anticipates, forecast plans, intends, believes, seeks, may, will, should, future, propose and variations of these words or similar expressions, or the negative versions of such words or expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, conditions or results, and involve a number of known and unknown risks, uncertainties, assumptions and other important factors, which could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements.
These risk factors are more fully discussed in MTech’s filings with the Securities and Exchange Commission. None of MTech, MJ Freeway or the newly formed holding company or Pubco that’ll be formed under the terms of the merger agreement, undertakes any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
In addition, the information on today's conference call will correspond to an investor presentation filed as an exhibit to the current report on Form 8-K filed by MTech on October 11, 2018 and all information provided on the conference call will be qualified by the information contained in such investor presentation. Investors should not rely on any information other than that contained in the investor presentation and when filed, the registration statement on Form S-4. This presentation contains financial forecasts with respect to MJ Freeway’s revenue and certain ratios and other metrics derived there from for the fiscal years 2019, 2020 and 2021.
These unaudited financial projections have been provided by MJ Freeway’s management, MJ Freeway’s independent auditors, have not audited, reviewed, compiled or performed any procedures with respect to the unaudited financial projections for the purpose of their inclusion in this presentation, and accordingly, do not express an opinion provided any other form of assurance or respect thereto for the purpose of this presentation. These unaudited financial projections should not be relied upon as being necessarily indicative of future results. The inclusion of the unaudited financial projections in this presentation is not an admission or positioned by MJ Freeway, MTech or Pubco that such information is material.
The assumptions and estimates underlying the unaudited financial projections are inherently uncertain and are subject to a wide variety of significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from those contained in the unaudited financial projections. There can be no assurance that the projected results are indicative that the future performance of MTech, MJ Freeway or Pubco that actual results will not differ materially from those presented in the audited financial projections.
Inclusion of the unaudited financial projections in this presentation should not be regarded as a representation by any person that the results contained in the unaudited financial projections will be achieved.
At this time, I would like to introduce Scott Sozio, MTech's Chief Executive Officer. By way of background, Scott is also the cofounder and managing director of Hypur Ventures. Prior to joining Hypur Ventures, he served as a partner at Van Dyke Holdings, the family office investment firm of MTech’s Chairman since its inception in 2013. Mr. Sozio has also served as a Director of Hypur, Inc., a banking compliance technology business and Simplifya Holdings, a cannabis compliance technology business.
With that, let me turn the call over to Scott Sozio. Please go ahead sir.
Thank you. Good afternoon. I'm Scott Sozio, CEO of MTech Acquisition Corp. Thanks for joining the call. We’re excited to have announce MTech’s merger with -- proposed merger with MJ Freeway a truly pioneering company that we believe provides the most robust, seed to sale software technology available to the cannabis industry today. Upon completion of the transaction, we expect MJ Freeway will enjoy a commanding financial advantage over its competition, funding organic growth and acquisition opportunities within cannabis technology. But before we get to MJ Freeway, I’d like to start the call with a little background on why we created MTech.
Around this time last year, we recognized the enormous investor demand for cannabis related companies, and we knew that the demand would only continue to grow. At the time, there were very few publicly listed companies with cannabis investment -- for cannabis investors to own. We created MTech as a vehicle for investors to gain exposure to the steep growth of cannabis industry through a security listed on a major U.S. exchange to ultimately merge with a market-leading cannabis related business. We recognize that a cannabis company with the public currency and a strong balance sheet would enjoy a significant advantage over its private competitors.
We believe we are seeing our thesis from a year ago play out, not only with our transaction with MJ Freeway but also in the market generally, as three Canadian cannabis companies have listed on major U.S. exchanges this year. Though, the legal cannabis landscape is still early in its development, market leaders are starting to emerge and access to the public markets is becoming an important competitive advantage.
On October 11, we announced that we had signed a merger agreement with MJ Freeway, whereby MTech will be combining with MJ freeway as subsidiaries under a newly formed Delaware holding company to be listed on the NASDAQ stock market. The transaction implies a $60 million enterprise value with approximately $10 million of cash on MJ Freeway's balance sheet. MJ Freeway currently has no debt outstanding. This price values MJ Freeway at 5.4 times fiscal 2019 estimated revenue and 3.5 times fiscal 2020 estimated revenue. We believe these multiples are very attractive compared to publicly-traded comparable companies and private market financings.
It is important to note that MJ Freeway equity holders are rolling 100% of their equity holdings into the combined company. Our merger comes on the heels of MJ Freeway recently closing a $10 million series C financing at evaluation of $60 million post money. Depending on the amount of redemptions by the stockholders of MTech, the combined company could have over $60 million of cash on the balance sheet at closing.
We believe this transaction is compelling and that significant future value will be created based on three main drivers; first, the technology. MJ Freeway's technology platform is built to scale as the only full ERP solution for cannabis operators that tracts the product from cultivation to consumer; second, the industry, cannabis is booming. MJ Freeway is poised to capitalize on the enormous growth that comes with the further legalization of cannabis across the country and the world; third, the capital advantage. With this transaction, MJ Freeway will be in a unique position to fuel growth through the acquisition of competitors and complementary service providers.
With that overview, I would like to introduce Jessica Billingsley. Jessica is Co-Founder and CEO of MJ Freeway. She has over 20-years of technology and systems experience and was recently included in Inc. magazine's 100 female founders list for 2018.
Jessica, please go ahead.
Thanks Scott. I would love to share a little more about MJ Freeway. MJ Freeway is the company that invented seed-to-sale technology. We are the largest cannabis technology company serving businesses and governments in 29 of the 31 legal U.S. states, and we're the only cannabis technology company operating truly globally with clients in 11 countries.
We provide technology products and consulting services across the entire cannabis supply chain, so from cultivation to manufacturing, to distribution, to retail. We provide the infrastructure upon which the cannabis industry can be built, enabling regulation at every point from taxation to tracking, to compliance. MJ Freeway has processed over $10 billion in cannabis sales for our clients to-date.
We have two core technology products, MJ Platform, and Leaf Data Systems. MJ Platform is our generation two seed-to-sale product for cannabis businesses. It is the first true ERP custom-built for the cannabis industry, enabling our commercial clients to control inventory, operate efficiently in a fast changing industry, mine business intelligence data, manage customers and vendors and comply with applicable regulations. Leaf Data Systems is a track and trace product for government regulators, such as the U.S. states who regulate cannabis. Leaf Data Systems enables government regulatory clients to effectively and cost efficiently monitor industry operators and ensure that commercial businesses are complying with regulations.
We have two state contracts, one with the state of Washington and also with the Commonwealth of Pennsylvania. The Pennsylvania state contract is unique, specifying the licensees' business management system. All operators in Pennsylvania must use MJ Platform, providing additional commercial up-sell opportunities and making us a preferred choice for multistate operators who already must use MJ Platform in Pennsylvania. And as part of our strategy we intend to pursue more government contracts. We believe only MJ Freeway offers the depth and breadth of a true end-to-end cannabis business solution.
So what does this transaction mean for us? The combination with MTech enables MJ Freeway to accelerate the scale and breadth of its technology platform, addressing the growing needs of the cannabis industry. The additional resources will allow MJ Freeway to pursue aggressive organic growth and strategic acquisitions. The platform is already built. And with pro forma of 60 plus million of balance sheet cash assuming no redemptions by MTech stockholders and will be listed on the NASDAQ stock market, we intend to accelerate our organic growth and pursue an aggressive acquisition strategy, putting us in position as the leading cannabis technology platform with scale to match the size of an increasingly global cannabis marketplace.
Now, I’d like to spend a minute sharing some more about our board composition moving forward. We've been fortunate to attract high-profile and prominent investors to-date, and we'll continue to have that representation moving forward on our combined Board, including representatives from MTech as well.
Our investor participation has been invaluable in the past, and we’re delighted to continue to have their participation moving forward. Early investors in MJ Freeway include Hank Handelsman and Roger McNamee. Hank has served as Executive Vice President and General Counsel at the The Pritzker, a private investment firm since 1998. He was also a senior executive of Hyatt Corporation for 36 years. Hank will serve as a director of our combined entity moving forward. Roger McNamee will serve as senior strategic advisor to the board. He has a 35 career as an investor in technology companies. He is known for having cofounded Elevation Partners and investment partnership focused on intersection of media and entertainment content and consumer technology. Also, Silver Lake Partners and Integral Capital Partners two technology focused funds.
We see that mentorship and guidance provided by our board as a tremendous advantage moving forward as we look to capitalize on the current and future cannabis market opportunity. The landscape of that current cannabis market opportunity is compelling. 31 states as well as the District of Columbia, Guam and Puerto Rico, have legalized medical cannabis; nine of the 31 states and the District of Columbia have legalized cannabis for adult use; 62% or 200 plus million Americans live in states that permit the use of medical cannabis. At 2017 Gallup poll showed that 64% of Americans support legalization and a majority of Republicans back it for the first time.
In 2017, legal cannabis sales reached $9.2 billion in North America; according to a report from Arcview Market Research and BDS Analytics, representing a 33% increase over 2016; the United States accounts for about 90% of the global cannabis market, but its control of the market is expected to decrease to about 57% by 2021, as legalization and decriminalization of cannabis products continue in other nations. Arcview Market Research also predicted the worldwide legal marijuana market to be worth $57 billion by 2027. All of this projected industry growth fuels opportunity, and MJ platform is projected to grow more than 50% in each of the next two years.
I’d love to introduce you now to Ruth Ann Kraemer, MJ Freeway’s CFO, who leads our financial operations. She served most recently as CFO of Tempo Financial Holdings, Tempo Financial U.S. Corporation and Unidos Financial Services, subsidiaries of Catalina Acquisitions. Previously, she served as CFO of Allegro Multimedia. Ruth Ann?
Ruth Ann Kraemer
Thank you, Jessica. From a fiscal year perspective 2018, MJ Freeway reported a 158% growth in software sales mostly due to securing the lease contracts with the states of Pennsylvania and Washington. These governmental contracts are stable and lucrative, ranging from one to five years in length and 800,000 to multimillion in yearly anticipated revenues.
The financial and analytical effects of the government contracts are to show increased revenues in year-one with the leveling of revenues as they inter-maintenance in the outer years. This can mask the performance of other revenue streams. For example, MJ Platform is projected to grow significantly from 2018 and '19, and more than 50% for each of the next two years. However, the 5% total software growth noted does not highlight these significant platform sales due to the weighted averaging that the large government contracts produced in their years of maintenance. We expect to win additional late contracts as more state governments become available to bid. And when weighted with the projected growth of MJ platform, total software revenue from 2019 to 2020 averages 68%.
In 2021, MJ Freeway forecast that government contracts will have found trajectory and accordingly expect significant growth and lease sales as a result. Combined with the MJ Platform projected growth of greater than 50% for the same timeframe, Freeway expects total software growth to increase 70% in 2021. Consulting services range between 5% and 13% for that same time period.
Gross profit margins in fiscal 2017 reflect MJ platform sales only. While fiscal 2018 forward reflects again the weighting of the large government contracts. MJ Freeway believes that this diversification of revenue streams is a strong healthy approach. And as a final observation, operating expense forecasted in growth, while the company settles in trends of approximately 13% in 2020 and '21 as the company executes its strategic plan.
With that overview, we will turn it back to Jessica Billingsley, CEO of MJ Freeway.
Thanks Ruth Ann. I just wanted to share something about what we see as our growth opportunities moving forward. So, we see one of our largest areas in new large emerging markets; there are three new adult unit markets that are opening now in California, Massachusetts and Canada; there are also three large medical markets currently emerging in Pennsylvania, Ohio and Florida; and there are a number of pending both adult use and medical bills in various states, as well as 14 pending federal U.S. cannabis bills and 20 international markets active or pending.
We also intend to grow our data analytics beyond our existing client base. So currently, a 100% of our license agreements since inception include the right to aggregate and monetize client data. We believe we have the largest statistically relevant data set of any competitor by far.
There is also a consolidation trend that we're tracking. Cannabis operations must operate at scale to compete in a maturing market. And MJ Platform is the only cannabis ERP with multi-state, multi-country, multi-language capability. We intend to leverage this reach through strategic acquisition as well. We intend to expand our set of technology services to increase network effects and acquire streams of complementary revenue. We also intend to leverage those internal and external network effects with our fully API-enabled platform through a partner consult and future MJP app store, as well as a B2B, business-to-business, supply chain management and wholesale marketplace.
And with that, I'll turn it over to Scott Sozio for some closing remarks.
Thanks Jessica. That’s a good overview of some of the opportunities we see ahead of us. So to sum it up, what we're building here is a single platform with the flexibility and scale to serve every market across the entire supply chain and in all regulatory environments. We think that this transaction provides a launching pad to achieve that goal, and we're looking forward to getting started. We'll provide further updates as we progress to closing, which we expect to occur in early 2019.
Thanks everyone for joining us.
Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect your lines. Thank you for your participation.